Put payoff diagram | Finance & Capital Markets | Khan Academy

ABCD’s stock price is $50 Let's draw a graph of the return of a put option The strike price is $50 and the option fee is $10 So we once again draw two types of return graphs One that only cares about options Value at maturity This type is more academic Often seen in business schools or textbooks The other is based on the profit and loss of option positions Drawn So it will reflect the price you paid for the option This is seen more in practice You have a put option Remember this is the right to sell the stock for $50 Assuming the stock is on the maturity date They are all on the expiry date The stock is trading at $0 on the expiry date The company went bankrupt What is the value of the put option now that it has no value at all? You can buy it at the market for about $0 now After you exercise Will sell it for $50 So you will definitely exercise So if the stock is $0 You will make a lot of money The put option is now worth $50 Because you bought for 0 dollars and sold for 50 dollars If you have put options If the stock price is $10 You can still buy stocks for $10 If you hold options You can exercise it and sell it for $50 You will make $40 So the option is worth $40 Anyone holding options will make $40 So when the value of stocks gets bigger and bigger The value of options will get smaller and smaller Until $50 When the stock price is $50 At this point you don’t care if you sell it for $50 The right to the stock bought for $50 Now it's not worth any money The value of the put option starts at $50 Because if the stock goes bankrupt You have the right to buy worthless stocks Sold for $50 After 50 dollars it became– It's worthless If the stock price is higher than $50 It's still worthless If the stock price is $100 or something You have no reason to exercise Because why do you exercise this right Sold for $50 What can be sold in the open market for $100 Let’s look at the profit and loss version The stock is worthless You bought it without flowers If you hold an option, you sell it for $50 But we have to reflect The fact that you bought an option for $10 So it’s not the option value of $50 It's worth 50 minus this So it's worth 40 dollars You will always exercise this option Until the option value is $50 But at $50, it’s not that it’s worthless You have to remember if the stock is equal to $50 You won't exercise But you paid 10 dollars for it So you won’t exercise what you paid 10 dollars for So you will definitely lose $10 So the option value starts at 50 Then it will get lower and lower Until this point if you don’t exercise You will accept to buy options without exercising Loss And any stock price above this You will only lose $10

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